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Potash Prices Have Come Down Near Our Long-Term Forecast, Eliminating a Potential Encumbrance to Equity Values

We're sticking with our price forecast of $375 per metric ton.

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With China and India back to buying potash after an extended hiatus in 2012 (global shipments were down 9% in 2012 from 2011), we expect demand growth of close to 10% in 2013. Potash prices should firm up from prevailing Saskatchewan spot levels around $420 per metric ton as the year progresses, although we don't expect a return to the heady levels of late 2011 ($550 per metric ton). Over the next five years, we still expect that supply will grow faster than demand, but the gap between the two has shrunk, given our expectation for strong near-term demand growth and some modifications to our supply forecast (projects shelved, longer ramp-up times, and so on).

Our long-term price forecast remains $375 per metric ton at the typical plant gate in Saskatchewan. Despite our expectation that prices will drop further, wide-moat Potash Corporation of Saskatchewan (POT), which benefits from low-cost assets, looks moderately undervalued. PotashCorp's position on the cost curve delivers some downside protection if our price thesis turns out to be too bullish. Narrow-moat  Intrepid Potash (IPI), which has a geographic cost advantage, is the most undervalued producer, in our opinion. We think producers' stock prices could have more room to advance now that potash prices have dipped closer to what we see as a more sustainable level.

Jeffrey Stafford does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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